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Making the most of outstanding debt

11th Jun 2012
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Sema Fongod of Factoring.uk.net reveals how invoice finance can enable businesses to capitalise on outstanding debt to grow.

Once a product or service is delivered, your business is credited with the sale amount. Unless the cash is collected, you do not actually generate any income. Outstanding invoices are a growing problem for businesses in several industry sectors.

Cost optimisation techniques help you incur recurring savings but there are certain expenses that you can’t avoid – rental for business premises, tax bills, payroll (even if it’s just yourself) and administrative costs. Without adequate cashflow, you wouldn’t be able to fund operations, re-invest and meet capital requirements and payments.

As a business owner, it could be quite frustrating when you’re unable to run your business effectively due to slow-paying customers. It is becoming more of a quirk as trade is done on credit terms of up to 90days.

In this difficult economic climate, every penny counts. Whether you’re a sole trader or an established multi-national company, you are reliant on working capital to run your business successfully.

Banks are being increasingly reluctant to offer credit facilities to businesses, especially SMEs and start-ups, prompting businesses to shop around for alternative sources of finance.

With cash locked up in unpaid invoices, how can you improve your cashflow without incurring any further debt? That’s what invoice finance is all about.

Release working capital with Invoice Finance

Invoice finance is a form of commercial funding whereby cash is released to a business against their unpaid invoices. In the majority of cases, up to 95% of the invoice value could be released to the business, usually within 24 hours. The remainder invoice value is paid to the business once the customer settles their bill.

As a start-up, there will be very few invoices outstanding but as the business grows and wins new customers, the amount of money tied up in sales invoices rises. This shows that the funds released via an invoice finance facility grows in line with a business’ turnover.

Generally, there are two forms of invoice finance: factoring and invoice discounting. Both facilities are cashflow solutions that release a pre-arranged cash advance against unpaid invoices but differ in the following ways:

  • Credit control: With factoring, the lender handles the credit control on behalf of the business, chasing customers and any outstanding payments. On the other hand, invoice discounting leaves the sales ledger management function in the hands of the business.
  • Target users: Because factoring involves outsourced credit control, the facility is well-suited to smaller businesses, including start-ups, with turnover in excess of £50k. Invoice discounting is ideal for larger businesses with in-house accounting procedures and credit control systems. A business could easily qualify for invoice discounting if it has turnover of at least £350k.

Benefits of Invoice Finance

Invoice finance can help you in the following ways:

  • Releases cash and boosts cashflow: Invoice finance provides you with the ability to meet your cashflow needs immediately. Instead of waiting the traditional 30-90 days for invoice payment, you get cash in as little as 24 hours.
  • Flexible funding: The working capital released grows in line with your sales turnover. The more you invoice, the more funding becomes available.
  • Bad debt protection: A non-recourse arrangement comes with credit insurance to ensure payment in the event of customer default.
  • Security: Unlike other forms of traditional finance such as bank loans and overdrafts, no other assets are required to secure an invoice finance facility. The funds are secured against the sales ledger.
  • Confidentiality: Should you require, the facility can be administered with the customers unaware of the lender’s involvement.
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